GST on Used Cars Increased to 18%: What Buyers and Sellers Need to Know

The GST Council in its 55th GST Council meeting held on 21st December 2024,  has announced an increase in the GST rate on old and used cars from 12% to 18%, raising questions among buyers and sellers about its impact. Let’s break it down to understand what this means for the used car market and how it affects you.

Who Does the 18% GST Apply To?

The increased GST rate applies only to registered dealers who are engaged in the sale of old and used vehicles. If you’re an unregistered individual selling your car, GST doesn’t apply to you. This is a significant relief for private car owners as no tax burden arises in personal transactions. However, if you’re buying a used car from a registered dealer, the GST is calculated on the dealer’s profit margin, not on the full value of the car.

Understanding GST on Dealer Transactions

The profit margin system ensures that GST is only applied to the difference between the purchase and selling price for the dealer. Here are two scenarios to explain:

1. Positive Margin Example:

• • A dealer buys a car for ₹5 lakh and sells it for ₹6 lakh.
  • The profit margin is ₹1 lakh.
  • GST at 18% applies only to ₹1 lakh, resulting in a tax of ₹18,000.

2. Negative Margin Example:

• • A dealer buys a car for ₹12 lakh but sells it for ₹9 lakh.
  • The margin is negative (₹-3 lakh).
  • As per Rule 32(5) of the CGST Rules 2017, GST is not applicable on transactions with a negative margin.

This provision ensures that dealers aren’t penalized for selling cars at a loss.

55th GST Council Clarification

The 55th GST Council meeting confirmed the following key points:

• GST applies only on the margin of the supplier (dealer) and not on the full vehicle value.
• No GST applies to transactions between unregistered individuals.
• The revised 18% GST rate applies to all categories of vehicles, including electric vehicles (EVs), petrol cars, diesel cars, and SUVs.

Impact on Buyers and Sellers

• For Buyers:
  The increased GST rate on the dealer’s profit margin may slightly raise the price of used cars. However, since GST is calculated on the margin and not the total price, the tax burden remains relatively manageable.
• For Individual Sellers:
  Selling a car as an unregistered individual remains GST-free, making private transactions unaffected by this change.

Key Takeaways

1. If you’re buying a car from a registered dealer, expect an 18% GST on their profit margin.

2. If you’re selling your car as an individual, GST doesn’t apply to you.

3. The new 18% GST rate impacts all old and used vehicles, including EVs.

4. GST on negative-margin transactions is exempt, reducing the financial strain on dealers.

Conclusion

The increase in GST rate for used cars reflects the government’s evolving approach to taxation in the automotive sector. However, the margin-based taxation system ensures a fair application, minimizing the impact on buyers and sellers.

Whether you’re buying or selling a used car, staying informed about these rules can help you navigate the process smoothly.

Stay Informed, Stay Compliant!